Unit 4: Session 3: Portfolio Management Styles, Strategies, and Techniques

Two of the major factors involved in the Capital Asset Pricing Model (CAPM) are - interest rates - risk - tax rates - time

2 & 4

Market timing is normally associated with which of the following portfolio management styles? A)Modern portfolio theory. B)Tactical asset allocation. C)Passive management. D)Strategic asset allocation.

B

Which of the following expounds that including non-correlated assets in a portfolio can reduce certain risks? A)Monte Carlo simulations B)Modern portfolio theory (MPT) C)Efficient market hypothesis (EMH) D)Capital asset pricing model (CAPM)

B - Instead of emphasizing particular stocks, modern portfolio theory (MPT) focuses on the relationships among all the investments in a portfolio. This theory holds that specific risk can be diversified away by building portfolios of assets whose returns are not correlated.

Which of the following is true of the weak form of the efficient market hypothesis? A)It implies that throwing darts is just as efficient as analyzing the market. B)It implies that insiders cannot make a profit from their trading. C)It implies that market information cannot be used to identify future price movements. D)It implies that stock prices react to information when it becomes publicly available.

C

One method security analysts use to define companies is by their market capitalization. How is a company with a market capitalization of $400,000,000 categorized? A)Large-cap. B)Micro-cap. C)Mid-cap. D)Small-cap.

D - The general consensus is that companies with a market capitalization between $300 million and $2 billion are considered small-cap. Less than that is micro-cap; larger is either mid-cap or large-cap.

Formula methods of investing that involve selling equities in rising markets and buying them in falling markets would include - constant dollar plan - constant ratio plan - dollar cost averaging - DRIPs

1 & 2

One popular method used to predict the expected return of a stock is the Capital Asset Pricing Model. Analysts using CAPM rely on all of these EXCEPT the: A)standard deviation of the stock. B)risk-free rate available in the market. C)beta coefficient of the stock. D)expected return on the market.

A

If the expected return on the market is 20% and the risk-free rate is 4%, a stock with a beta coefficient of 0.8 would have an expected rate of return under CAPM of: A)19.2%. B)12.8%. C)16.0%. D)16.8%.

D - The formula is the risk-free rate (.04) plus the product of the stock's beta (.8) and the difference between the expected return on the market and the risk-free rate(.20 - .04). In this case, it would be .04 + .8(.16) or .04 + .128 = .168

One of the offshoots of the capital asset pricing model (CAPM) is the Capital Market Line (CML). The equation for the CML uses which one of the following? A)Standard deviation B)Correlation coefficient C)Alpha D)Beta

A

Your client's child is entering college next year. Which of the following would be the most appropriate recommendation? A)A 5-year laddered portfolio of U.S. Treasury notes B)A U.S. Treasury note mutual fund C)A zero-coupon bond maturing in 5 years D)A large-cap growth fund

A

Under Modern Portfolio Theory (MPT), all portfolios that can be constructed from a given set of stocks is referred to as the A)feasible set B)correlation coefficient C)capital market line D)efficient set

A - A feasible portfolio is defined as a portfolio that an investor can construct given the assets available. The feasible set is the collection of all feasible portfolios. Once we have the feasible set, we can select the efficient set (the most return for a given amount of risk, or the least risk for a given amount of return).

A stock has a beta of 0.8, and the risk-free return is 9%. If the market return was 15%, what would be the expected return of the stock? A)13.8% B)13.2% C)12.0% D)14.2%

A - The computation is the risk-free rate (RF) plus the (beta × [market return - RF]). That would be 9% + (.8 × 6%) or 9% + 4.8% = 13.8%.

According to the Efficient Market Hypothesis, one using fundamental analysis would most likely be of the opinion that he could do better than one following A)semi-strong form market efficiency B)charts C)strong-form market efficiency D)weak-form market efficiency

D

One method of diversifying an investment portfolio is by spreading it out among different investment classes. Which of the following would be considered an asset class? A)Gold jewelry B)A small-cap index fund based on the Russell 2000 C)Automobiles D)Real estate

D

One of the offshoots of the capital asset pricing model (CAPM) is the Capital Market Line (CML). The equation for the CML uses which one of the following? A)Beta B)Alpha C)Correlation coefficient D)Standard deviation

D

Which investment style does NOT take into consideration whether a specific security is under or overvalued? A)Active B)Contrarian C)Growth D)Indexing

D

If the risk and return profiles of all the possible risky portfolios were plotted on a graph, those portfolios that would be the most attractive to investors would lie on A)the efficient frontier B)the y-axis C)the capital market line D)the security market line

A